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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R
PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the Order dated 11.03.2015 of Commissioner of Income Tax (Appeals)-11, Chennai, in for the AY 2005-06.
2.0 First issue in this appeal covering Ground Nos.2 & 3 are related to loss on cancellation of foreign currency forward contracts. The Assessing Officer (hereinafter referred to as ‘AO’) during the assessment proceedings found in Schedule-12 of the accounts that the assessee claimed loss on exchange difference (net) ₹12.64 lakhs as deduction. During the assessment proceedings, the assessee explained that the assessee is engaged in manufacturing of control systems, instrument clusters, assortment of plastic components and complete cockpit assemblies and in the course of manufacturing, the company imports certain components to be used in the business for the purpose of manufacturing/assembling.
In order to cover the exchange rate risk on import payables, the company has entered into foreign currency forward contracts. As per the terms of the contract, the company anticipate the date on which the liability to pay for imports would arise and accordingly, enters into a forward contract to purchase foreign exchange at a pre-agreed rate on specified date.
However, in case the liability towards imports does not arise on the ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 3 -: exercise date, the forward contract to be cancelled. Consequentially, the company is required to settle the liability arising as per the terms of forward contract, based on the difference in the pre-agreed exchange rate and the exchange rate as on the date of cancellation of such contract. In the process the assessee incurred the loss of ₹1,15,06,084/- appearing in the Schedule-12 of the financial statements represents loss of the aforesaid nature.
3.0 The assessee explained before the AO that any loss or gain arising from such transaction is a business loss or gain and relied on the decision of D Kishorekumar & Co. v. DCIT (2005) 2 SOT 769, CIT v. Badridas Gauridu Private Limited (2003) 261 ITR 268 (Bombay HC) and CIT vs. Soorajmull Nagamull (1981) 129 ITR 169 (HC) (Calcutta). The AO noticed that the assessee’s main activities were manufacturing of control systems, plastic components, etc., for automobiles. The AO further observed that the assessee has not entered into such forward contract for earlier year 2004-05 and this is a new venture. The assessee was also not sure of importing any material when the forward contract was entered in to and it was only a presumption on the part of the assessee that the liability may arise in future. The assessee did not produce any acceptable evidence to show that this forward contract in foreign exchange only to ward off any increase in the value of foreign currency. In the absence of the details,
ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 4 -: the AO did not accept the assessee’s submission that the foreign exchange loss is a business loss. The AO distinguished the case laws relied upon by the assessee stating that it was held in the case laws that the forward contracts entered into by the relevant assessee was integral part of the assessee’s business and they cannot be considered in isolation. But in the case of the assessee, the assessee has not proved that the forward contract of foreign exchange is an integral part of the business. The AO relied on the decision of 146 ITR 168 CIT AP-III v. Pullaiah Seshaiah & Company and held that the forward contract entered into by the assessee in respect of foreign exchange is well within the definition of speculative transaction enshrined in Sec.43(5) of Income Tax Act and hence, the amount of ₹1,15,06,084/- was disallowed u/s.73(1) of Income Tax Act.
4.0 Aggrieved by the order of the AO, the assessee went on appeal before the Learned Commissioner of Income Tax(Appeal) (hereinafter referred to as ‘Ld.CIT(A)’) and the Ld.CIT(A) requested the assessee to furnish the details regarding claim of foreign exchange forward contracts agreement, booking details and cancellation details and the Learned Authorized Representative (hereinafter referred to as ‘Ld.AR’) was unable to submit the relevant details and relied on the financial statement and the case laws. Ld.CIT(A) also observed that the assessee has not claimed any such loss in the earlier years i.e. prior to 2004 & 2005. Since, the ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 5 -: assessee did not file the details called for and the Ld.CIT(A) confirmed the addition made by the AO.
5.0 Aggrieved by the order of the Ld.CIT(A), the assessee filed appeal before this Tribunal.
Appearing for the assessee, the Ld.Sr.Counsel, Mr. R.
Vijayaraghavan argued that the foreign currency forward contracts are integral part of the Appellant’s business and it does not constitute separate activity or trade. Therefore, the Ld.AR contended that the loss on account of foreign currency contract required to be allowed as business expenditure. Further, the Ld.AR submitted that at the time of appeal before First Appellate Authority, the details called for by the AO as well as the Ld.CIT(A) could not be furnished since he could not obtain the required details. The assessee has filed petition for admission of additional evidence and submitted that given the opportunity the assessee would be in a position to furnish the details of forward contracts entered into were relateable to the business carried on by the assessee in connection with the imports forecasted or the actual imports of the assessee. Therefore, the assessee has requested to remit the matter back to the file of the AO to afford an opportunity to prove the case.
ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 6 -:
6.0 On the other hand, the Learned Departmental Representative (hereinafter referred to as ‘Ld.DR’) has not objected for remitting the matter back to the file of the AO.
7.0 We heard the rival submissions and perused the material placed on record.
The assessee has not furnished the details of forward contract and the nexus of the forward contracts to the business carried on by the assessee. In the absence of the details and documents, it is not clear as to whether the forward contracts are in relation to the business carried on by the assessee or a separate activity carried on by the assessee. Unless, the assessee submits necessary evidence to establish that the forward contracts are entered into in the interest of the business carried on by the assessee, it is not possible to decide whether the loss on account of the foreign exchange was a business loss or not. Therefore, the issue needs to be verified from the assessment records as well as the evidences submitted by the assessee. Therefore, in the interest of the justice we are of the view that the case should be remitted back to the file of the AO to decide the issue after verifying the facts and information. Accordingly, we set-aside the orders of the lower authorities and remit the matter back to the file of AO to consider the issue afresh on merits. It is needless to say that the assessee should be given a reasonable opportunity to submit the ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 7 -: details and the explanations. The assessee also should co-operate with the AO in furnishing the necessary details for early completion of the assessment proceedings.
8.0 The Next issue in the appeal is disallowance of interest amounting to Rs. ₹2,92,115/- for diversion of interest bearing funds.
During the assessment proceedings, the AO found that the assessee has advanced short term loans to its sister concern M/s.Visteon Powertrain Control Systems (India) Ltd and earned the interest of ₹7,78,974/- on advance of ₹33.00 cr. @8%, and the assessee is paying interest at the rate of 11% on loans borrowed by it. Therefore, the AO has called for explanation from the assessee as to why the difference amount interest paid and received (i.e. 11%-8%) should not be disallowed. The assessee furnished explanation but the AO has not been convinced with the assessee’s explanation and disallowed a sum of ₹2,92,115/- being the difference in the interest rate paid on borrowed funds and loans advanced to sister concern. The assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) observed that the assessee has not satisfactorily explained the difference in the lending rate and the rate which was borrowed and confirmed the addition made by the AO.
ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 8 -:
9.0 Aggrieved by the order of the Ld.CIT(A), the assessee filed appeal before us.
During the appeal, the Ld.Sr.Standing Counsel argued that there was no outstanding loan from 12th October 2004 and there is no need to disallow the interest from 12th October 2004 onwards and further submitted that surplus funds were advanced and there is no nexus of borrowed funds and the loans granted and hence no disallowance is not called for. On the other hand the Ld.DR relied on the orders of lower authorities.
10.0 We heard the rival submissions and perused the material placed on record. The assessee has charged interest 8% against the payment of interest on borrowings @11% and reasons for charging the interest lower than interest paid was not explained. When the interest was charged by the assessee on the amount of advances given to sister concern, the explanation of availability of interest free funds does not hold water.
Therefore, we do not find any infirmity in the Order of the Ld.CIT(A)
However the Ld.AR submitted that here was no loan outstanding subsequent to 12/10/2004 and no difference of interest has to be charged from 12/10/2004. This issue require further verification from the assessment records. Therefore we remit the matter back to the file of the AO with direction to verify the actual period of outstanding and charge the ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 9 -: difference of interest only during the period of loan. This ground of appeal is partly allowed for statistical purposes.
11.0 In the result, the appeal of the assessee is partly allowed for statistical purposes.
12.0 (i) AY 2006-07 (ii) ITA No.1395/2016 for the AY 2007-08 and (iii) ITA No.1552/15 for the AY 2008-09 The above appeals are filed by the assesses for the A.Y 2006-07 to 2008-09 relating to the same issue of foreign exchange loss on forward contracts which was decided by us for the AY 2005-06 in the earlier paragraphs in this Order. For the AY 2007-08 the AO disallowed ₹1,56,90,000/-, for the AY 2006-07 the AO has made an addition of ₹83,70,000/-, for the AY 2008-09 the AO has made an addition of ₹4,34,64,959/- on account of foreign exchange loss on forward contracts, which was confirmed by the Ld.CIT(A). Since, the facts of the case are the same as that of AY 2005-06, the appeals on the issue foreign exchange loss for the AYs 2006-07, 2007-08 & 2008-09 are also remitted back to the file of the AO to decide the issues afresh on merits in the light of the discussion made in the appellate order for the A.Y. 2005-06 in the ITA Nos.1551 & 1552/Mds/2015 AYs: 2005-06 & 2008-09 & & 1395/Mds/2016 AYs: 2006-07 & 2007-08 :- 10 -: preceding paragraphs. The assessee is directed to furnish the necessary details and the AO is directed to decide the issue afresh on merits.
13.0 In the result, the appeal for the AY 2006-07 to 2008-09 are allowed for statistical purposes.
Order pronounced in the Open Court on 15th March, 2017, at Chennai.